Why FICO’s New Credit Model Won’t Boost Your Score

FICO has changed its credit-scoring model by putting less focus on medical debts and will give consumers a break on their score if they’ve settled with a collections agency. While it’s a welcome move, experts say it’s unlikely to change credit scores for most people anytime soon.

Fair Isaac Corp. on Thursday announced “a more nuanced way” to assess consumer collection data, bypassing paid collection agency accounts and distinguishing between medical and non-medical collection agency accounts. “This will help ensure that medical collections have a lower impact on the score,” the company said.

Consumers with only unpaid medical debts could see a 25-point spike with its latest model “FICO-9,” it added. “It seems consumers will be treated more fairly under these new credit score calculations,” says Susan Grant, director of consumer protection at the Consumer Federation of America.

Medical bills make up around half of all debt collections, says Odysseas Papadimitriou, CEO of personal finance site WalletHub, but a 25-point increase on FICO scores — which operate on a scale of 300 to 850 — may be optimistic. “FICO makes it sounds like lenders use FICO and nothing else,” he says. The more sophisticated lenders — including all major credit-card companies — are more likely to use their own credit models, “and, therefore, they can use whatever data that they see fit,” Papadimitriou adds. “Thus the FICO announcement is a moot point in that regard.”

And lenders may be unwilling to accept just one credit score, if they suspect that it doesn’t represent the full picture. FICO has now changed the definition of risk by no longer recognizing the entirety of a person’s credit history, but banks will stick with their own best methods, says Gail Cunningham, spokeswoman for the National Foundation of Credit Counseling. “Depending on their business model, lenders may not be able to rely as strongly on solely using the credit score as the guideline for extending credit, but will need to actually review the credit report to discover the full picture,” she says.

Because a person doesn’t choose to get sick, lenders have already been more forgiving of past-due medical bills, Cunningham says. “Many lenders have also given less weight to a paid delinquency of any kind, particularly if it was many years in the past, she says. “Therefore, the FICO scoring changes may not impact lending standards as much as some anticipate. A person’s credit history will remain the same. The score just got a little lipstick.”

The Consumer Financial Protection Bureau disagrees: A recent CFPB report said consumers may be “overly penalized” for medical debt.

FICO’s move appears to be part of a wider trend in the industry. VantageScore, one of the main competitors to the FICO model, introduced “VantageScore 3.0” in March 2013 to exclude all paid collection accounts including paid medical accounts. “The real test of a model’s capability is how it performs on each lender’s unique portfolio,” says Barrett Burns, president and CEO of VantageScore, which is owned by three credit reporting companies, Equifax, Experian and TransUnion. But VantageScore 3.0 has gained traction among the largest lenders, Burns adds, which could bode well for FICO.

Others say excluding medical debt from credit scores is long overdue. It will bring relief to consumers who have been burdened with impaired credit scores resulting from delinquent medical debt, says Ben Woolsey, president of credit-card advice website CreditCardForum.com. “As the CFPB noted, medical debt is fundamentally different than other types of consumer credit,” he says. It’s often incurred by non-payment by an insurance and/or poor communication to the consumer prior to it being turned over to collections agencies by hospitals or health-care providers, he adds.

And for those most likely to benefit — people with pristine reports except for medical debt — banks may move slowly. The new scoring system, involving 12 new scoring models across the three national credit reporting agencies, will take years to obtain a critical mass of users, as adoption is expensive and time consuming, says John Ulzheimer, credit expert at financial website CreditSesame.com. “FICO 8,” the most current version of the FICO score, was introduced in July 2009 but only recently adopted by most major lenders, he says. “Market availability does not mean immediate market adoption.”

Fannie Mae FNMA and Freddie Mac dictate what scoring model versions can be used in their underwriting systems, Ulzheimer adds. “As of today, all Fannie and Freddie mortgage loans are underwritten using FICO scores that are one generation off the most current,” he says. “When FICO 9 becomes available [they] will be two generations off.”

This means that consumers with medical collections and/or paid collections will still be present on the consumer’s credit reports and get no score improvement when they apply for a mortgage, he says.

“There is no one single FICO credit score,” says Edgar Dworsky, founder of ConsumerWorld.org. Consumers who have substantial unpaid medical debt, but who are otherwise up to date on their regular credit accounts, could see a significant increase in their credit score, he adds. But that doesn’t mean they automatically will, he says. “The real issue is whether credit grantors will adopt the new way FICO is proposing to figure credit scores,” Dworsky says.